Harford wrong on carbon taxes

Well, not completely wrong (he is right that in principle taxes and caps achieve similar economic outcomes if implemented) but let me explain. In the FT today, Tim Harford argues that at Copenhagen negotiators should be focused on getting agreement on a tax rate on emissions to levied at the G20.

Cameron Hepburn, co-editor of The Economics and Politics of Climate Change, points out that quantity regulation puts knotty issues of distribution and compensation at the heart of the international negotiations. Harmonised carbon taxes put these questions to one side. They could be – and would have to be – discussed separately.

The problem with this is illustrated neatly by the Australian case. Suppose that this is agreed to. Then would Australia ratify this agreement? It is unclear. Who would it apply to? Surely more than the top 1000 emitters and likely to involve consumers and agriculture. If we trust that the current CPRS represents what is a possible coalition, that alone might be enough to kill the whole deal in Australia. Instead, an agreed emissions cap for Australia lets it sort out its own way of achieving it. By giving that flexibility, surely more countries are likely to sign on.

Put simply, caps mean that distributional issues that are inter-country have to be resolved at an international level while local ones can be resolved locally. A broad tax leaves inter-country distributional issues until later but ties them to local resolutions in order to get an agreement. Our experience to date suggests that right now, local issues dominate the G20.

I agree with you, but there is much more to it than this. Let me illustrate.
Suppose that the tax on all countries is levied by an international body (eg the World Bank) who must then decide how to allocate the tax revenues between countries. To be equivalent to the Harford proposal, each country must receive tax revenue in proportion to its actual emissions under the carbon tax. So, per capita, US citizens get (say) 10 times more tax rebates than Chinese ones. Why? Because they emit 10 times more.
A carbon tax equivalent to ETS, other hand, would see tax rebates allocated in proportion to each country’s target emissions rather than actual emissions. Thus, we can recognise the inequity in the above example and correct it by giving China (say) a higher permit allocation relative to its actual emissions.
Put another way, the Harford proposal is equivalent to an ETS with each country’s targets set to what they would actually be under a specified carbon price.
So, the Harford proposal does not avoid the need to allocate the global emission target between countries, but simply creates a “default” allocation which so overwhelming favours developed countries it would never be agreed to by the rest of the world.